Luigi Zingales: Congress needs to keep debt ceiling

This "polite" email I received was a colleague's expression of dissent for my position on the potential benefit of a federal debt ceiling. The extremeness of his position might seem justified by the fact that the totality of leading economists appears to agree on the dangers posed by this historical leftover – the totality except me.

How do we know? The Initiative on Global Markets at the University of Chicago every week asks a panel of 40 leading economists a policy question. Last week's question was: "Because all federal spending and taxes must be approved by both houses of Congress and the executive branch, a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse fiscal outcomes." As it turns out, I was the only one to disagree.

In part, this is not so surprising: the question was loaded. It was not asking whether it will necessarily lead to worse fiscal outcomes, nor whether it will, on average, do more bad than good, but merely the possibility that it would. How can anybody sensibly disagree with a mere possibility? Are the rest of my fellow panelists right?

To strengthen their argument, there is President Obama's position: the responsibility lies with Congress to pay for spending it has already authorized. While Sen. Obama in 2006 voted against raising the debt ceiling, his current position seems eminently rational. If all the expenses have been previously approved, what is the purpose of an additional check? Doesn't this check add extra uncertainty that is jeopardizing our feeble recovery?

Most couples periodically sit down to discuss family expenses, even if they are the same people who not only authorized but also consummated those expenses. Have they lost their minds, too? No. To properly manage their resources and avoid falling into excessive debt, wise families periodically reassess their expenses to ensure they are compatible with their level of revenue.

Why shouldn't Congress do so as well? Especially since, in Congress, all expenses are approved on the basis of rough estimates, which often turn out to be underestimates. Since these periodic reassessments are unpleasant (I dread the ones with my wife), it makes sense to have a mechanism that forces them. Thanks to the government, we are offered at least one such a mandatory assessment: tax day, April 15. But who forces it on Congress?

Fortunately, the debt ceiling does.

Yet, for Congress there is an extra reason for such forced reassessment. Politically, it is very costly to introduce taxes and very rewarding to grant benefits, especially when these benefits are granted to your own political constituency. The problem becomes more severe when past Congresses grant entitlements that grow over time and that nobody dares to touch.

When Congress approved Medicare in 1965, Americans were expected to live 14 years past their 65th birthday, and the average cost of a Medicare enrollee was less than $2,000 in today's dollars. Today, senior Americans live five additional years, and the average cost of an enrollee is $11,000.

Given the political power of seniors, no elected politician can be expected to propose reductions in Medicare. Yes, use of the debt ceiling by the Republicans as leverage on spending is tantamount to holding a gun to the head, but not of the American people, as the president said, but to the heads of lawmakers more concerned about reelection than about the future of the economy.

Luigi Zingales is a professor of entrepreneurship and finance and the University of Chicago's Booth School of Business.